On 11 November 2022, the People's Bank of China and the former Banking and Insurance Regulatory Commission jointly issued the "Notice on Doing a Good Job in Current Financial Support for the Stable and Healthy Development of the Real Estate Market" (《关于做好当前金融支持房地产市场平稳健康发展工作的通知》), outlining 16 supporting policies, aimed at "maintaining orderly and stable real estate financing, improving financial services for building handover, handling risks of distressed real estate companies, and increasing financial support for housing rental".
Since then, China's overall real estate policy has relaxed. On 10 July 2023, the People's Bank of China and the National Financial Supervision and Administration Bureau issued an additional notice to extend the policy period, reaffirming Beijing's commitment to supporting the "healthy development" of the real estate industry. The policy extension involves two key points:
1. Financial institutions were encouraged to actively support existing real estate development loans and trust loans, using methods such as loan extensions and adjusted repayment arrangements. Loans due before December 31, 2024, could be extended for an additional year without changing their classification.
2. For commercial banks adhering to Notice (2022) requirements, loans issued to support the delivery of unfinished projects before 31 December 2024 will not be downgraded in risk classification during the loan term. For newly issued loans that become non-performing, the related institutions and personnel who have fulfilled their duties can be exempted from liability.
Despite the perceived moral hazard and the hurdle it presents to China's desired consumption-driven economic development model, Beijing's persistent policy support for the real estate industry raises the question: why does the Chinese government staunchly back this industry? Three political-economic explanations shed light on this conundrum.
Firstly, sustaining economic growth is the primary national interest in China. As per the Proposal from the Fifth Plenary Session of the 19th Central Committee of the Chinese Communist Party, China aims to become "a medium-level advanced nation" by 2035. China is now in the process of rapid urbanization and industrialization. Even though the country's GDP growth rates are expected to be lower in the foreseeable future than in the last three decades, the government still aims to maintain modest growth rates of around 4-5% per annum. These targets reflect the Chinese top leadership's strong will to sustain the Kuznetsian modern economic development and the political legitimacy of the Chinese Communist Party.
Over the past decade, the real estate industry has significantly contributed to China's "economic miracle", accounting for an average of 13.4% of GDP since 2013 (Figure 1).
Figure 1. Real Estate Industry's Investment as % of GDP in China
Source: Author's analysis from China's National Bureau of Statistics
Assuming a total consumption coefficient of approximately 0.6, the real estate industry's total contribution to China's GDP in 2022 was estimated at 17-18%. Given the unstable external environment and the challenges of domestic economic transition, high-level fixed asset investment and support for the real estate industry appear to be the Chinese government's most viable options for the near and medium term.
Secondly, Chinese local governments rely heavily on revenues generated from selling land to real estate developers. This land sales revenue forms a substantial part of the Chinese local governments' income (Figure 2). When adding taxes, the real estate industry contributes nearly 40% of the government's fiscal income.
The fiscal income from the real estate developers is utilized for local economic development, including infrastructure projects. These infrastructure developments, in turn, attract further investments, stimulate local economies, and create jobs, forming a cycle of economic growth. As a rational player, the Chinese government, especially at the local level, has strong incentives to support and stabilize the real estate industry.
Figure 2. Land Sale Revenue as % of Government Fiscal Income in China
Source: Author's analysis from China's Ministry of Finance; note that with taxes, China's real estate industry accounts for nearly 40% of the Chinese government's fiscal income.
It is certainly true that the land-sales-focused fiscal system could potentially lead to a myopic view in governmental decision-making, with an over-reliance on the real estate sector that has already led to an imbalance in the broader economy and raised concerns about long-term sustainability. Still, as a significant source of government fiscal revenue, the real estate sector is favored even at the expense of other vital sectors.
Thirdly, the real estate industry employs a significant portion of the workforce. According to the Fourth National Economic Census, as of 2018, the industry directly employed 12.64 million people, a 44% increase compared to the end of 2013. Considering the housing construction industry, which employed 35.91 million workers, the total number of people in real estate-related jobs in 2018 was close to 49 million.
During times of economic hardship, the role of the real estate industry as a significant employment support becomes exceptionally crucial. Over the last five years, due to the U.S.-China trade war, the pandemic, and domestic deflationary pressure, China's surveyed unemployment rates in 31 large cities have increased more than 12% to 5.5%. More notably, surveyed unemployment rates of workers between 16 and 24 years old have spiked 86% to 20.8% (Figure 3). If widespread unemployment were to occur within the real estate industry, the consequences could be far-reaching, causing more extensive economic damage and social problems. Therefore, the resilience of the real estate industry is of paramount importance for the Chinese government to stabilize the Chinese economy and society for the foreseeable future.
Figure 3. Surveyed Unemployment Rates in China
Source: Author's analysis from China's National Bureau of Statistics
In summary, despite the Chinese government's insistence that "houses are for living, not for speculation" to curb speculative bubbles in the real estate industry, it has consistently supported this sector due to its crucial role in underpinning China's GDP, generating governmental fiscal revenue, and preserving employment. The government is likely to continue propping up the real estate industry to prevent systemic issues in the foreseeable future.
Twelve years ago, I argued in a VoxEU article that the path of China's economic transition would be bumpy. My current analysis suggests that the journey remains challenging and prolonged. The real estate sector, while it has been instrumental in China's rapid economic growth, presents complex challenges in the context of this transition. Balancing economic stability, employment preservation, and the prevention of speculative bubbles has been and will continue to be a delicate task.